GREATER JUSTICE, LOWER COST

December 3, 2008

"Loser pays," refers to the policy of reimbursement by the parties who lose in litigation of the winners' legal expenses, including attorneys' fees. Applying loser pays to U.S. courts could be an important part of a larger effort to reduce litigation costs, better compensate prevailing litigants, and better align tort law with its goal of deterring socially harmful conduct, says Marie Gryphon, a senior fellow with the Manhattan Institute.

A loser-pays rule would discourage meritless lawsuits, but because any such rule should also ensure plaintiffs of modest means but strong legal cases access to justice, Gryphon calls for:

A robust litigation insurance industry similar to those that now exist in other loser-pays countries.

And a cap on recoverable fees to eliminate the incentive that large litigants might have to attempt to "buy a verdict" under loser pays.

How would loser pays affect the American legal system? According to Gryphon:

Almost every economist who has studied loser pays predicts that it would, if adopted, reduce the number of low-merit lawsuits.

A loser-pays rule would encourage business owners and other potential defendants to try harder to comply with the law; doing so should produce fewer injuries.

Loser pays would deter ordinary low-merit suits, but it would not discourage low-merit class actions to the same extent because the risk of enormous losses, rather than the costs of legal defense, is the primary source of pressure on defendants to settle.

Alaska and Florida are two states that have had significant practical experience with loser pays:

In Alaska, which has always had a loser-pays rule, tort suits constitute only 5 percent of all civil legal matters -- half the national average.

Between 1980 and 1985, Florida adopted a loser-pays rule that applied exclusively to medical malpractice cases but was ultimately dropped; in significant respects, the Florida loser-pays rule seems to have worked to weed out weaker cases and facilitate case disposition.

The rate at which medical malpractice lawsuits were dropped after initial discovery rose from 44 percent to 54 percent of all such filings, and the percentage that proceeded to trial (instead of being dropped or settled) was half of what it had been under the American rule.